Hundreds of drug stores and retail merchants are holding their
breath over a coming train wreck if the IRS refuses to recognize
the CDH debit card system used in virtually all major retail outlets.
Right now the IRS has given no sign it will respond to the threat.
Since the majority of card transactions are for FSAs, and the
FSA product is already taking a publicity hit over the new limits on
OTC purchases, it could be a real zinger if the media catches on to
the fact that FSA cards may not work as a result. The deadline is
January 1, but immediate guidance is considered a relief valve.

The IRS regs on OTC purchases by debit cards under PPACA
went beyond the statute, and in the real world prohibited debit
cards from being used for many legal OTC drug purchases with
prescriptions. Nobody is sure why the IRS is being brain‐dead, but
one likely reason is that they are also under pressure to meet a
long list of other new regs under PPACA, like allowing employers
to list their health insurance payments on employee W‐2 forms.
Drug stores and card firms say they expect this would also
cause the blocking of purchases of all prescribed drugs at many
stores nationwide, not just OTC drugs, because the IRS is requiring
use of the existing validation process to determine if there is a
prescription. For example, if a cardholder is prescribed Claritin it
is read by cards as OTC, and is not listed in the system as a
prescribed drug ‐‐ so there is no risk it will violate PPACA.

“The most recent IRS guidance had one line that said cards
cannot be used for prescribed OTC,” Evolution Benefits CEO Chris
Byrd told CDMR. “However, the existing card system can be
absolutely compliant and the charge is only paid if Rx is
considered by pharmacy processing. The IRS simply doesn’t get
it.”

The adoption of the new card validation system two years ago
is credited as a huge advance in the CDH model where cards are
used to pay medical expenses out of HSAs, HRAs and FSAs. A new
analysis of card use by SIGIS shows that out of a dozen or so of the
most common card denials for prescriptions, only two are specific
to the rising use of CDH cards across the market.

Reasons Why CDH Cards Sometimes Don’t Work1. The cardholder is attempting to purchase only non-healthcare
eligible items with a card that has only an FSA and/or
HRA purse attached.

2. The participant’s plan only reimburses the
prescription drug amount, and (a) The merchant does not send
the Rx amount in the authorization message (b) The plan requires
a match to claims from a pharmacy benefit manager (the
cardholder’s prescription drug plan) and the transaction failed to
match (c) The merchant sends the Rx amount but does not
support partial auth and there are non‐Rx items being purchased.